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There's a slightly puzzling analysis out from claiming that is about to face an $8 billion tax bill in Ireland. This is as a result of a European Commission investigation into the company's tax affairs in that country. What's puzzling about this claim is that those making it seem not to be aware of the subtlety of the issues under discussion. We do actually know what it is that the EU is investigating and we also know what it is not investigating.

It is undoubtedly true that Apple very carefully manages its tax affairs and that it does so through using certain provisions of Irish and American tax law. However, the European Union, the European Commission, is not able to dictate to the member nations what corporate taxation laws should be. It is, however, allowed to involve itself in (in fact tasked with) policing illegal state aid. This is where one company is offered preferential treatment: and a preferential tax rate is considered to be a form of that state aid which may indeed be illegal.

Where all have access to the same rate or law this is not preferential: and thus not illegal state aid. The first point that should be cleared up here is that there simply will not be any fines upon Apple whatever the result:

Apple probably wouldn’t be the direct recipient of a fine in any case, some have argued, since the subject of the investigation is the government of Ireland. But given the state of the Irish economy, especially its national debt, the government would presumably try to recover money from Apple.

This simply isn’t so. And over and above the error concerning the content of the reports there is no possibility of a fine upon Apple whatsoever. For in cases of illegal state aid there never is a fine levied upon the company or recipient of such aid. The government that allowed or paid out the aid must recover it, that’s true, but there’s no fines over and above that even if there’s a finding of said illegal aid. Again, this just isn’t how the Commission undertakes its public policy on these matters. Yes, abuse of a monopoly (for example, or creating a cartel) can and will lead to fines on the companies that perpetrate these abuses. That’s probably just and righteous: it is the companies doing the illegal thing after all. But if anyone is in error about illegal state aid then it’s the state making the aid: so the recipient, the company, doesn’t get fined at all.

That's not actually "some have argued" at all. That's someone phoning up the Commission and asking them and getting the blunt reply "No, there never will be a fine on a company in a case of illegal state aid." It's a basic fact about how the system works.

In the Bloomberg analysis there's a basic misunderstanding of what is being investigated:

Irish back taxes could take an $8 Billion bite out of Apple Apple could be on the hook for more than $8 billion in back taxes as a result of the European Commission’s Irish tax investigation. Based on rulings from 1991 and 2007, Ireland allows Apple to calculate taxes using operating costs of certain Irish subsidiaries as a net profit indicator, resulting in taxable profits less than 0.2% of the subsidiaries’ sales. The commission may opt to use gross margins as a net profit indicator, resulting in taxable profits of $64.1 billion from 2004-14 taxed at Ireland’s 12.5% rate.

Yes, as my own earlier piece pointed out it is about transfer pricing and the basis upon which profit is calculated. However, whatever the Commission finds it cannot then go about insisting that all of that Apple profit be subjected to Irish taxation. Simply because there's a part of the system which Bloomberg hasn't understood: and it's a part of the system that the Commission has no power over.

That point being that the structure is in fact the Double Irish. There is one Irish company which is Irish taxable: there's another Irish company which is not Irish taxable. And the profits from the first are sent off as royalties for the use of intellectual property into the second. That second Irish company, being not Irish resident, is not Irish taxable (Ireland operates a territorial tax system which makes this so).

This structure is available to all: it is not preferential. Thus it is not and cannot be state aid. And the Commission cannot look through the various layers of companies and insist that Ireland tax a non-resident Irish company. It can indeed look at whether Apple got a special deal or not, which is what it is actually doing.

Informed gossip all along has been that if the Commission rules against Ireland in this matter then the country will be asked to reclaim some $200 million from the company in past tax not paid. There will be no fine: and that sum will cover the decade, so some $20 million a year. Real money, yes, but not a considerable sum for a company the size of Apple.

Of course, there's always the possibility that I'll have to eat my hat over this. But my opinion is that Bloomberg has misunderstood the underlying economics and public policy of corporate taxation in the European Union. The system is deliberately set up so that countries can charge whatever rate they like, on whatever basis they like. This competition thus acting as downward pressure on the rates of that very damaging form of tax, the corporate income tax. The only thing that the Commission does have power over is illegal state aid. And for something to qualify as that it must be preferential, available only to the select. It's possible that some minor parts of Apple's structure fall foul of that structure but not, as Bloomberg is assuming, the whole of it. Simply because that whole is available to all companies who wish to use it. Thus any tax reclaim will be upon that minor part of the structure that infringes, not upon the whole.